In The Tank For Saunders

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Established in 1951 and listed on the ASX in 2007, Saunders specialises in steel tanks, for bulk liquid storage tanks, and the infrastructure that goes with them.

It never ceases to amaze me, as a long-time sharemarket observer, what listed companies do for a crust – the sheer variety of businesses.

Saunders International Limited (SND) is a case in point. Established in 1951 and listed on the Australian Securities Exchange (ASX) in 2007, Saunders specialises in steel tanks, for bulk liquid storage tanks, and the infrastructure that goes with them. It designs and builds tanks for a wide variety of blue-chip clients ranging from multinational oil, gas and mining companies to water authorities.

Saunders specialises in water reservoirs, petroleum tanks, and acid, bitumen and chemical tanks. To build its tanks, Saunders makes its own steel plate at its workshop at Condell Park in western Sydney. But it doesn’t just design and build tanks: it also inspects, assesses, repairs, maintains and decommissions tanks for other parties, and performs project management for companies installing “tankage.”

In particular, inspection and maintenance work provides significant recurring revenue. In the year to 30 June 2014, designing and building tanks generated 55% of revenue, while maintenance and repair contracts brought in the remainder.

Saunders has been a good performer on the stock exchange: over five years, its total return (capital gain plus dividends) has run at 30.5% a year. It has done even better over three years, with a total return of 35.4% a year. But over the last 12 months, Saunders has mostly lagged the market return, at 7.4%. After peaking at a record high of $1.01 earlier this month, the stock has come back to 90.5 cents, which gives Saunders a market capitalisation of $71 million.

For the year to June 30 2014, revenue rose by 15%, to $69.3 million, driven by a strong growth in design and construction, and maintenance, activity. Net profit was up 10%, to $6.4 million.

Cash flow from operating activities surged by 86%, to $9.5 million. Earnings per share (PPS) were also up 10%, at 8.1 cents, while a final dividend of 4 cents a share made 6 cents for the year, fully franked, a lift of one cent, or 20%.

Return on assets (ROA) was 28%, while return on equity (ROE) was an impressive 47.4%.

Cash on the balance sheet swelled from $12.9 million to $18.2 million, up 41%, while the company has no debt.

Some of the relative nervousness the market has shown about the stock in 2014 can be attributed to the fact that the company operates mainly in the oil and gas sector, which was the source of 88% of revenue in FY14 (with water infrastructure contributing 9% and chemicals tanks responsible for 3%). Undeniably, the oil and has industry is experiencing significant change.

For example, the closure of the Shell and Caltex refineries in Sydney and the BP refinery in Brisbane will cut into Saunders’ maintenance revenue. But on the plus side, those refineries are planning to modify their existing ‘tank farms’ to convert them to fuel import and storage terminals, and Saunders can reasonably expect to generate significant recurring revenue from this change. It is currently working on the conversion of the Caltex refinery at Kurnell in NSW and is scheduled to start similar work on the Shell refinery at Clyde. (Most of the Clyde work will be done in FY16.)

Also – and partly as a result of change at the refinery level – independent bulk liquid storage terminal operators are actively planning to expand storage facilities around Australia, which will require a large build of new tanks. Saunders should also pick up opportunities from this development: the company has flagged a “significant increase” in revenue from New South Wales in the current financial year, driven by storage terminal activity (NSW accounted for 51% of the company’s revenue in FY14.)

Saunders said in its FY14 result that the strong second-half provided good momentum for the current financial year. The work backlog at 30 June 2014 of $28 million was down 28% on the backlog of $39 million at 30 June 2013, but tendering activity remained strong. The value of ‘live’ (yet to be awarded) tenders stood at $57 million.

The company said that the current half-year would be “likely to experience reduced revenue,” but that it expected a “strong second half” to FY15. Saunders is looking to drive business growth through improved manufacturing efficiency and construction performance, and an ongoing process to build-in the ability to provide EP&C (engineer, procure and construct) services for clients.

At the current share price of 90.5 cents, Saunders appears to be trading at 9.8 times FY15 forecast earnings, a very undemanding price/earnings (P/E) ratio. On yield grounds, the expected 8-cent dividend for FY15 equates to a prospective fully franked dividend yield of 8.8%. Stock Doctor reports that analysts expect 11% revenue growth in FY15 and 13% growth in EPS, with the company working its equity to the tune of 52.7% expected ROE. Although these numbers are prospective – and not cold hard cash – they are certainly impressive.

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au